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Sales tax is less of a factor in online shoppers’ buying decisions

August 9, 2016 12:11 PM

Fewer consumers say they are deterred from making an online purchase if the retailer charges sales tax than said so a few years ago, according to a new survey by Bizrate Insights, a division of digital marketing technology firm Connexity Inc.

Only 29% of shoppers surveyed Aug. 1-4 called sales tax an important factor in their purchase decision, versus 37% when Bizrate Insights asked the same question in 2013 and 2011.

Behind the shift may be the reality that more online retailers are charging sales tax as they build more warehouses around the country and thus become required by more states to collect and remit sales tax. That’s especially true for Amazon.com Inc., No. 1 in the Internet Retailer 2016 Top 500, which now collects sales tax in 28 states compared with six states four years ago.

“As the largest online retailers, such as Amazon, expand their distribution networks such that more and more online purchases become eligible for sales tax—in addition to evolving sales tax laws—most consumers are accepting the reality and considering additional factors as they choose where to shop,” says Hayley Silver, vice president of Bizrate Insights. “This slow move away from the race to the bottom price for the majority of online buyers should be welcome news for retailers who invest in the customer experience and exclusive products.”

Nonetheless, the Bizrate Insights data shows a significant number of online shoppers still avoid e-retailers that pay sales tax. Among the consumers who did not pay sales tax on their most recent purchase, 48% said sales tax was an important consideration, versus only 24% of those who paid sales tax. Bizrate Insights surveyed 6,216 online buyers immediately after they had made a purchase this month on the websites of some 4,500 online retailers in the United States and Canada.

Among all consumers surveyed, 24% said sales tax becomes a bigger factor as the cost of the order goes up. 17% said sales tax matters if they have a choice between buying online or locally and 15% when they have a choice between online retailers. 9% said it’s always important, and 39% that it’s not something they consider.

In all cases, the consumers who did not pay sales tax were more likely to react to seeing tax added at checkout. 29% of those who did not pay sales tax said they focus more on sales tax as the cost of the order goes up versus 23% of those who paid sales tax; 21% of nonpayers said sales tax is important if they have a choice of buying locally and 17% when choosing between online retailers, versus 15% and 14%, respectively, of shoppers who paid the tax.

Of those surveyed, 51% said they had paid sales tax on the purchase they just completed, 28% said no and 21% did not know.

The sales tax issue looms larger for online retailers now that such states as South Dakota and Alabama are openly challenging the prevailing federal law that requires online and catalog retailers to collect sales tax only in states where they have a physical presence, such as an office or warehouse. Some believe Congress or the U.S. Supreme Court could take up the sales tax question as early as next year. (For a full report on the online sales tax debate see the upcoming October 2016 issue of Internet Retailer magazine.)

Amazon’s experience as it has begun charging sales tax in more states in recent years provides something of a test of consumers’ willingness to pay tax on web purchases. And the Amazon data does not provide a clear answer.

An Ohio State University study released in 2014 concluded that requiring payment of sales tax in five states reduced Amazon’s sales in those states by 9.5%, and by 15.5% on orders over $150. But a 2016 study by Slice Intelligence, which collects purchasing data from the email receipts of some 4 million consumers, concluded there was no impact when Amazon began collecting sales tax in Colorado and South Carolina.

Slice vice president and principal analyst Ken Cassar says Amazon Prime, which offers consumers free, two-day shipping for a year for a $99 annual fee, has made Amazon shoppers less price-sensitive. “They value the convenience more than they value the tax saving,” he says. “The growing importance of convenience is one of the key trends impacting the e-commerce space today, beyond just Amazon. Price and selection are still key pillars of the channel, but they aren’t as dominant as they used to be.”

Executives at apparel retailer Betabrand are “loosely following” the sales tax debate, says chief marketing officer Aaron Magness. “If we were looking to open more stores, it would be an issue,” he says. Primarily an online retailer, Betabrand, No. 640 in the Internet Retailer 2016 Second 500 operates one bricks-and-mortar store in San Francisco and only collects sales tax in its home state of California.

Magness says charging sales tax has little impact on the e-retailer’s conversion rate, because consumers are used to paying tax when they shop in physical stores.

“If you’re an online retailer and your only value-add to shoppers is that you don’t charge sales tax, you have other things to worry about,” Magness says. “If that’s your differentiation, you’re not differentiated enough.”